Friday, February 10, 2017

Is a strong exchange rate good or bad?

So apparently Pres. Trump has asked his national security adviser if it was a strong dollar or a weak dollar was good or bad.

I ask this on my tests regularly ... almost every class I teach has it in one form or another, actually. And since the article doesn't answer it for you, here are the correct answers depending on the class:

Correct answer a) in every class - There is no such thing as "strong" or "weak". It's all relative. So then I ask whether "stronger" or "weaker" is better. [PS - This is the kind of pedantic right answer that is useful for students and should not be given to the President of the United States, just in case you are in that position.]

Correct answer for intro students - It depends on who you are. Exporters, the tourist industry, and firms competing with imports prefer weaker while importers, consumers, and tourists prefer stronger. So if you produce shirts, you like a weaker dollar at the office and a stronger dollar at home.

Correct answer for intermediate macro students: It depends on WHY the dollar changed. NEVER REASON FROM A PRICE CHANGE. I can tell you an example where a stronger dollar is good for just about everyone in the US and I can tell you an example where a stronger dollar is worse for just about everyone. The relative strength or weakness of the dollar by itself doesn't matter. WHY did it change?

Correct answer for international (trade) students: What matters for investors is what direction it might move in the future. If you are planning to invest abroad, you want the dollar to get weaker over time. If you want to attract foreign investment, you want them to believe the dollar will get stronger. Unless of course the WHY is something bad for your firm (Why still matters)

Correct answer for development economics students: One theory claims you can boost economic growth by weakening your currency so you export more. The problem with that theory is that the way you weaken your currency is via inflation or taxing your people so you can buy up a lot of foreign currency, either of which will have negative effects on your economy too.

Given that very long answer, I'm not surprised Trump didn't ask an economist.

1 comment:

  1. I think I will add your blog to my reading list. I like your fresh approach.

    Here is a fresh idea from my blog:

    An analog and crisp definition of money:

    An analog of "money" is "mercantile money", commonly known as a "gift certificate".

    A crisp definition for "money" is "Money is a National Gift Certificate".

    It's food for thought.

    It seems to me, that when you consider how a merchant creates "mercantile money", sells or trades it for services (trade is possible), and accounts for the amount outstanding, the parallels with commonly used money are informative.

    I am looking forward to reading more of your work.